Woes Afflicting Mortgage Giants Raise Loan Rates

July 23 2008 - Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.

Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.

The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.

Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market.

Worried that the companies may not be as big a support to the market as they have been, bond investors are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.

The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates.

For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colorado.

Woes Afflicting Mortgage Giants Raise Loan Rates
by VIKAS BAJAJ | New York Times